Rail Dividends Trending Higher, 2011 Outlook (UNP, GSH, NSC, CSX, CNI, CP, BRK-A, BRK-B)

It turns out that Warren Buffett was right about railroads. They are part of a country’s fabric, and their place as a relatively low-cost shipper is well-fixed in a country’s infrastructure. Now that view is paying off in the form of dividends.  Union Pacific Corp. (NYSE: UNP) has announced that the company is raising its quarterly dividend for a second time this year to $0.38/share. This lifts the company’s yield from 1.4% to 1.7%, and raises Union Pacific’s yield from the bottom of six railway companies to somewhere in the middle.

Along with Union Pacific, we also looked at Guangshen Railway Co. Ltd. (NYSE: GSH), Norfolk Southern Co. (NYSE: NSC), CSX Corp. (NYSE: CSX), Canadian National Railway Co. (NYSE: CNI), and Canadian Pacific Railway Ltd. (NYSE: CP). Here’s how they stack up on the basis of dividend yield:

• Guangshen Railway  pays $0.51 for a 2.5% yield;
• Norfolk Southern pays $1.44 for a 2.3% yield;
• CSX Corp. pays $1.04 for a 1.7% yield;
• Canadian National pays $1.07 for a 1.7% yield;
• Union Pacific pays $1.52 for a 1.7% yield;
• Canadian Pacific pays $1.05 for a 1.6% yield.

There is an obvious here… more dividend raises could be on the way, if the railroads want to maintain current investor yields going forward.

Buffett’s own Burlington Northern Railway has boosted shares in Berkshire Hathaway Inc. (NYSE: BRK-A; BRK-B), but the company does not pay dividends.

Not everyone sees a silver lining in railroad stocks. Goldman Sachs today downgraded Norfolk Southern from ‘Hold’ to ‘Sell’ and lowered the company’s target share price from $62 to $59. The stock is trading at over $61/share so far today. Goldman cited higher costs, smaller price increases, a negative view on coal shipments from Appalachia, and declining intermodal traffic as reasons for the downgrade.  Goldman could be right, but strength in railroad stocks has been building and all the stocks we’ve looked at are priced well below their mean targets.

Paul Ausick